Barroso blames eurozone crisis on US banks

[malaise]

http://www.guardian.co.uk/world/2012/jun/18/g20-summit-barroso-eurozone-crisis
<snip>

The opening day of the G20 summit was threatening to deteriorate into a fractious row between eurozone countries and other non-European members of the G20, notably the US, as EU commission president José Manuel Barroso insisted the origins of the eurozone crisis lay in the unorthodox policies of American capitalism.

As Europe's leaders came under intense pressure to act decisively to cure the euro's ills, and a campaign gathered pace to relax some of the austerity programmes laying waste to countries burdened with unsustainable debt levels, Barroso insisted that Europe had not come to the G20 summit in Mexico to receive lessons on how to handle the economy.

When asked by a Canadian journalist "why should North Americans risk their assets to help Europe?" he replied: "Frankly, we are not here to receive lessons in terms of democracy or in terms of how to handle the economy.

"By the way this crisis was not originated in Europe … seeing as you mention North America, this crisis originated in North America and much of our financial sector was contaminated by, how can I put it, unorthodox practices, from some sectors of the financial market."

------------------------
He is correct

[Vincardog]

1. Damned straight. The longer we (all) try to soldier on and ignore the financial criminals

And their crimes the longer we remain in this ever worsening financial death spiral

[Scootaloo]

3. And the damnable thing is, it'd be easy to fix!

We're not talking about a problem that we have to put our greatest thinkers on to figure out here. All the tools already exist and are well-known, they just need to be put into place.

For instance, the Glass-Steagall act. This was instituted to separate commercial banks from securities firms. It prevented banks from using their customer's money to gamble. it worked great. it prevented the staggering losses of '29 (and would have prevented the losses of the '05-'10 period, too) and it did so without diminishing the wealth of any banks or securities firms. it was win-win for everyone.

Seriously, the tools are all there. Three generations ago, our grandparents and great grandparents put into place a series of regulations that were crafted exactly to prevent what has happened. Almost all of them have been repealed or remain unenforced.

[dkf]

5. The problem is bad loans. How does Glass Steagall fix that?

[Taitertots]

8. The problem is that banks did bad things with marginal loans

They should have never securitized the loans. Rating agencies should have never given AAA rating to tranches of sub-prime loans. Derivatives based on those securities should have never been sold. The people who sold them should have had to claim those derivatives as a liability on their financial statements.

The default rate alone was never high enough to justify the financial mess we are in.

[FarCenter]

9. Glass Steagall wouldn't have prevented the crisis -- it was mostly non-bank financial institutions

Lehman Brothers, AIG, GMAC, Merrill Lynch, Bear Stearns, Countrywide, Washington Mutual were not commercial banks as defined by Glass Steagall. They were a mix of investment banks, insurance companies, and thrifts (formerly known as savings and loans).

Citigroup got into trouble, partly because of its Smith Barney unit, and Wachovia got into trouble because of Golden West (a thrift).

But otherwise JPM, WFC and BofA would have been OK had then not been obliged by the government to acquire other troubled financial institutions.

[Taitertots]

10. It is my understanding that Glass Steagall would have dramatically limited securitization

And it would have kept those bad securities and derivatives out of the hands of commercial banks.

Not being an expert on Glass Steagall, I'd appreciate if you could link to a source indicating that Glass Steagall wouldn't stop commercial banks from originating, selling, and holding mortgage backed securities and derivatives based on them.

[FarCenter]

13. How would Glass Steagall have limited securitization

First, securitization dates back to about 1970, and it was completely legal when Glass Steagall was in effect.

Second, much of the securitization was done by the financial industry outside of the commercial banks. This non-bank financial sector became very large and the steps taken during the crisis were mainly to merge failing non-bank financial institutions with banks so that they could be saved from collapse by the Federal Reserve and Treasury. For example, Bear Stearns, which was not a bank, was merged into JP Morgan Chase at the urging of the government in an "arranged marriage".

Ironically, the mergers of non-banks and thrifts into the banks so that they could be saved by the government is what contributed to their present size.

See also a further response below.

[girl gone mad]

11. Glass-Steagall may not have prevented the crisis, but it would have reduced the scope dramatically.

The biggest danger from the crisis in 2008 was the collapse of the banks, not the investment banks. Banks provide the life blood of our economy: liquidity. That liquidity is protected by the FDIC and the strict rules imposed to keep banks from leveraging deposits with risky investments. Glass-Steagall prohibited commercial banks from underwriting securities and investment banks from accepting deposits. Commercial banking and investment banking were separated. Gramm-Leach-Bilely Act of 1999, made significant changes to Glass-Steagall. The act repealed the Glass-Steagall Act's restrictions on bank and securities-firm affiliations and amended the Bank Holding Company Act to permit affiliations among financial services companies, including banks, securities firms and insurance companies. Thus the mergers of banks and financial institutions beginning in 1999 and resulting in the Too Big To Fail behemoths. Under Glass-Steagall, bank deposits had to be protected with conservative investments which provided better assurance of good underwriting procedures. Glass-Steagall should be re-enacted. Investment banking, banking and insurance should be segregated to adequately diversify the risks or our financial institutions.

[FarCenter]

12. The crisis of 2008 was the collapse of other financial institutions, not commercial banks

The collapse was almost exclusively among financial institutions that were not commercial banks and except for the thrifts, they were not insured by the FDIC and did not have retail bank deposits.

The non-commercial bank sector of the financial system had grown quite large by 2008. A major source of funding for mortgages during the '00s was mortgage brokers, who sold to mortgage wholesalers, who sold to non-bank financial institutions, who securitized the mortgages and sold them off to foreign institutions, mutual funds, pension funds, endowments, insurance companies and the like while holding some tranches on their own books.

It was the largest of the players in this business who got into trouble. If you heard of DiTech Mortgages, they were part of ResCap owned by GMAC, which was part of General Motors and not a commercial bank. Lehman Brothers was a major investment bank that securitized mortgages, as was Bear Stearns and Merrill Lynch. Recall that Goldman Sachs was not a commercial bank at the time either, and they became a bank so that they could access the Fed window during the crisis. AIG was an insurance company and it was AIGs writing of credit default swaps on securitized mortgages that caused their collapse.

It is a completely false notion that the US Government could have allowed the non-commecial bank sector of the financial industry to collapse and that just saving commercial banks would have been enough. The non-commercial bank sector was bigger than the commercial bank sector, particularly in providing funding for businesses. Also, the mutual fund industry and investment firms like Merrill Lynch, Bear Stearns, and others contain most of the savings and retirement investments of US population.

[banned from Kos]

14. Exactly - Lehman, Bear, and Merrill were not effected by Glass-Steagall

not were hundreds of others.

Which I can name if you like.

[WorseBeforeBetter]

15. "it prevented the staggering losses of '29"?

WHUT?

Glass-Steagall was enacted in 1933.

[Scootaloo]

16. I meant "prevented them from happening again"

Slip of the ol' fingers there, my mistake.

[meow2u3]

2. Damn right Barroso is correct

I'll name names. The real culprits are Goldman Sucks, JP Morgan Chase, AIG, etc., with their global con games. They conned Europe.

[dkf]

6. The European banking sector is larger than ours.

Their regulations are looser than ours. Moreover a lot of the problems come out of the loose regs in the UK.

I don't know what the blanket blame on US banks is about.

[Nye Bevan]

4. Right. The problem is nothing whatsoever to do with trying to impose a currency union on separate

political entities, without enforcing any kind of fiscal harmonization, and enabling countries such as Greece which didn't really qualify to join to cook their books and participate anyway.

Well I blame Belgium for Jean-Claude Van Damme, and I think I am more justified.

[dkf]

7. US banks have become the convenient bogeyman for everything wrong in the world.

[Prometheus Bound]

17. It's not completely clear to me how Canadian practices contaminated Europe's financial sector.

[geek tragedy]

18. Poor, innocent, helpless Europe.

Practically a slave to the US.

[entanglement]

19. European bankers and politicians are just as treacherous, greedy and venal as their US counterparts

Plenty of blame to go around, that's for sure.

[sabrina 1]

20. He's right.

Don't know why anyone is acting surprised.

But that doesn't let corrupt politicians over there off the hook. The Greed spread and there are greedy, corrupt people everywhere who will jump at a chance to make easy money. But it did start here.